Education

Dr. Econ: How many recessions have occurred in the U.S. economy?

January 2008

This is a timely question, especially with much discussion of the current condition of the economy in early 2008 devoted to questions about slowing growth and a potential recession.

The quick answer is that the National Bureau of Economic Research (NBER), the group that determines the official dates for periods of economic expansions and contractions, has identified 32 U.S. recessions since the mid-1850s. However, that’s going back a bit too far for most of us!

So, let’s examine the period from the mid-1940s through the end of 2007. Before we move on to examining the data, let me point out that there are at least a couple of definitions of a recession. One commonly used definition is two consecutive quarters of negative growth. However, the NBER defines a recession in a different way (as discussed on their website):

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

For our purposes, let’s look at data on the level and growth rate of real (inflation-adjusted) gross domestic product (GDP), a measure of the total final output of goods and services in the economy over a period of time. It is published on a quarterly basis by the Bureau of Economic Analysis (BEA) and is available from their website. We’ll compare the real GDP data with data on recessions (as defined by NBER). Since 1945, there have been ten recessions identified by the NBER. The NBER uses a series of monthly economic indicators, rather than quarterly GDP data, to examine business cycle turning points, but the real GDP data generally tell a similar story. You might also want to check out my June 2003 response for a description of some of the monthly data the NBER analyzes to determine business cycle turning points.

Characteristics of U.S. economic expansions and contractions

NBER records show that, over the period from the mid-1940s until 2007, the average recession lasted 10 months, while the average expansion lasted 57 months, giving us an average business cycle of 67 months or about 5 years and seven months. However, there has been considerable variation in the length of business cycle expansions and contractions in the past. Fortunately, over the past 25 years the United States has experienced only two relatively mild recessions and extended periods of expansion.

The shortest recession between the mid-1940s and 2007 lasted only six months, from January to July 1980. The two longest recessions during the period lasted 16 months each, one extending from November 1973 to March 1975, and the other from July 1981 to November 1982. In both of these periods there was a noticeable decline in real GDP.

In contrast to the relatively short duration of most recessions, periods of expansion tend to last much longer, helping the economy expand over time. The shortest expansion period from the mid-1940s until 2007 lasted only 24 months, from April 1958 to April 1960. The longest expansion continued from March 1991 to March 2001, setting a record of 120 consecutive months of growth.

Patterns of growth

Chart 1 plots both the level of real GDP (in chained 2000 dollars) and the percentage annual rate of growth in real GDP each quarter over a period of about 60 years ending in the final quarter of 2007. Periods of economic contractions or recessions as defined by the NBER are shown in the chart as gray bars.

Chart 1: Real Gross Domestic Product: Level and Growth Rate

The blue line in the chart (measured in billions of chained 2000 dollars on the right axis) shows the growth in the economy over time as measured by real GDP. You can see that U.S. real GDP has followed a strong upward trend, climbing from under $2 trillion in the last half of the 1940s to $11.7 trillion at the end of 2007. While the overall trend is clearly upwards, the chart shows that real GDP tends to flatten out or dip around recessions; this is especially noticeable during the longer recessions of 1973-1975 and 1981-1982. If you were to examine monthly payroll employment data for the same six decades, the growth pattern would be similar, although the downturns around recessions would be even more pronounced.1

We can examine the short-term gyrations in real GDP around recessions more closely by looking at the red bars in the chart. Bars above the zero line indicate a positive annualized growth rate in real GDP for that quarter, while bars dropping below the zero line signify declines in the real GDP (negative growth). 2 As can be seen from the chart, recessions typically include quarterly declines in real GDP. However, negative growth is not the only indicator that signifies a recession. Just as it is possible to have some quarters of positive real GDP growth during a recession, it is also possible to have some quarters of negative real GDP growth at a time when there is not a recession. Thus, you can see why economists look at a variety of indicators to determine whether or not the economy is in a recession.

Current situation

In late 2007 and early 2008 the U.S. economy has slowed dramatically. In the fourth quarter of 2007, the initial (subject to later revisions) quarterly growth rate for real GDP was reported at only 0.6 percent. That pace of growth is far below the economy’s potential growth rate of 2.7 percent for 2007, as estimated by the Congressional Budget Office (CBO).3

Economists and the NBER will be examining new data frequently to determine whether the economy in 2008 has merely entered a period of slow growth or whether the economy could be moving towards a recession. Stay tuned.

For further reading:

You also might notice, as mentioned earlier, that the quarterly declines in the 1990-1991 and 2001 recessions were relatively mild compared to most of the earlier recessions, making NBER’s job of dating the recessions more difficult. For an interesting assessment of the situation in 2001, before the NBER had focused on whether a recession had started, you might review the October 19, 2001, FRBSF Economic Letter by Glenn D. Rudebusch, “Has a Recession Already Started?”

3. Potential GDP is a measure of the economy’s maximum sustainable output, that is, the level of output produced when the intensity of resource use is neither adding to nor subtracting from inflationary pressures. To read more about the CBO’s methodology for estimating potential GDP, please refer to the CBO’s publication, “A Summary of Alternative Methods for Estimating Potential GDP.”